On January 21, 2021, New Zealand-based language service provider (LSP) Straker Translations announced the acquisition of Lingotek, a Utah-based translation management system (TMS) provider and LSP in a cash-and-stock deal.
Sydney-listed Straker (ASX: STG) will pay Lingotek’s owners USD 6.47m on closing — USD 5.27m in cash and USD 1.2m in Straker shares. The deal is expected to close on February 1, 2021. In addition, Straker will pay up to USD 3.13m in cash in an earn-out over two years contingent on Lingotek “hitting significant over-achievement of revenue and consistent margins.”
Lingotek Founder and CEO, Jeff Labrum, will join the Straker leadership team along with other key senior Lingotek executives such as Nick Ramond, CTO, Brad Ross, Director of Product, and Greg Larsen, Director of Revenue.
At USD 7.9m in 2020 annual revenues, Lingotek is considerably larger than previous Straker acquisition targets. About 40% of Lingotek’s revenue (or USD 3.2m) is from SaaS subscriptions for the company’s translation management system. The remainder is from language services.
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Straker, meanwhile, reported full-year 2020 revenues of NZD27.7m (USD 20m) in a press statement. The combined company’s pro-forma annual revenue of USD 28m moves it further up the Slator Language Service Provider Index.
The deal values Lingotek at 0.82x revenue (pre-earn out) and 1.21x revenue including the full earn-out. Lingotek is currently operating EBITDA-negative, but Straker said they expects it to be EBITDA break-even in FY22.
Lingotek was founded in 2006 as an early entrant into the cloud-based TMS space. In 2008, the company received funding from VCs In-Q-Tel and Signal Peak Ventures. The Straker acquisition now allows Lingotek’s early backers to exit after an extended 13-year period.
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In an investor presentation, Straker calls the acquisition “transformational” and outlines the strategic rationale behind it. From a technology point of view, Straker said Lingotek’s connectors will help save some R&D budget as the company ramps up its recent IBM win.
Straker will also look to use Lingotek as the “on ramp” for content on to Straker’s translation productivity platform, hoping this connectors-meet-CAT approach will give it a competitive edge.
The deal also provides what Straker calls “critical mass” in the vast US market, and brings new enterprise accounts with room to up- and cross-sell. Lingotek’s key accounts include Nike for its TMS, and recent additions include big names such as Oracle, Coursera, and Zoom.
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Enterprise accounts are difficult to build organically and Straker said it typically takes them 12–24 months to work their “way to a head office relationship where we change the nature of our supplier relationship from regional to global.”
Finally, the deal brings recurring SaaS revenues to Straker’s service-based revenue profile.
Paying Dearly
While the approximately 1x revenue valuation for a mixed SaaS and services business, which opens up the huge US market, may seem attractive, the funding of the deal does not come cheap for Straker.
To finance the cash portion of the deal, Straker has entered into two new debt facilities for a total committed amount of NZD 8m (USD 5.77m).
The first secured simple-term debt facility of NZD6.5m (USD 4.68m) is provided by “a syndicate of high-net-worth investors, some of whom were early Straker investors.” The interest rate — a whopping 10.5% — means Straker will pay NZD 0.65m (USD 0.468m) over the loan’s 12-month maturity.
The second, an unsecured simple-term debt facility, is for NZD 1.5m (USD 1.08m) and pays a per-annum interest rate of 11.5%. Straker said the loan is provided by an entity associated with Steve Donovan, a Straker non-executive director.
Investors’ reaction to the deal was muted with shares closing the day up 1.8% after the announcement.